The Ethereum merger (The Merge), originally scheduled for June, has been postponed yet again. Nevertheless, the merger is one of the most notable events of the year as a major milestone in Ethereum's upgrade process.

Some people may confuse "merger" with "expansion," but these are actually two phases of Ethereum's upgrade. The core problem solved by "merger" is to switch the consensus mechanism from POW to POS to reduce energy consumption, which does not lead to scaling in itself; while scaling is the key to solve Ethereum's scalability problem and improve throughput.

Ethereum's lack of scalability has always been the biggest constraint to its development, and has given other public chains ample window to compete. If Ethereum scales successfully, it will unlock huge potential, and the evolution of this global infrastructure will certainly affect the public chain landscape and even breed new application tracks.

What are the core problems to be solved by Ethereum scaling, what are the current mainstream solutions, and how to understand the upcoming "merger" and multiple Layer2 projects?

Ⅰ. The logic and impact of "merger

1.1 Consensus mechanism change: from POW to POS

The Ethereum mainnet currently adopts the Proof of Work (POW) consensus mechanism, in which miners must first violently solve for a specific value and prove that they have paid the price by consuming arithmetic power before they are eligible to produce new blocks. The two most important parts of the Ethereum roadmap are the switch from POW to POS, which avoids excessive energy consumption, and the expansion path described above, with changes to the consensus mechanism taking precedence.

In December 2020, the "Beacon Chain", which is the future main network, will be online and run independently from the main network. The beacon chain is stable in terms of block issuance, and the verifier can also pledge Mining and receive block revenue from the beacon chain, but it has not yet assumed the actual function. "The beacon chain will also be an important part of the "expansion" route, which will be introduced in detail below.

The goal of "merger" is to place the "consensus" logic of the Ethereum mainnet on the beacon chain, while the "execution" logic still runs on the original mainnet. To understand what this change means for Ethereum's operation, we need to understand Ethereum's blocking process first.

A full block-out cycle in Ethereum, consisting of the following steps.

(1) "Execution": the miner picks some of the new transaction requests and executes the transactions, verifies that they are all valid, updates the local EVM copy, and generates potential blocks.

(2) "Proof of Workload": after the miner completes the local execution and verification, it will start the proof of workload to qualify for the block.

(3) "Consensus": eventually, one miner who has qualified for the block will broadcast the executed transactions to the whole network nodes, and other nodes will revalidate and execute locally to confirm the block validity.

(4) "Multi-party storage": After finishing consensus, all nodes will update the EVM copy status to save the latest transaction history.

After merger, the above mentioned "execution" and "multiparty storage" remain unchanged and still run on the original Ethereum mainnet, while miner is replaced by an ETH pledge on the beacon chain, pledging at least 32 ETH to participate in block out and validation. After the block is produced and broadcast, the beacon chain will assign a group of verifiers to verify the block and complete consensus.

In contrast to the original process, miner is replaced by a pledge, and the trust cost of miner is changed from consuming arithmetic power to pledging assets. The "proof of work" is eliminated, thus reducing the energy consumption by ~99%.

Since the cost of issuing blocks has dropped significantly, many people mistakenly believe that this will lead to a drop in ETH processing fees and even a performance increase, but this is actually a misconception. Next, we'll cover the impact of merger.

1.2 One of the effects of merger: TPS and fees remain the same

Contrary to many people's intuition, the TPS and fees remain the same after merger, even though the cost of block issuance is reduced, because the core reason is that the block size and speed of block issuance are basically unchanged. This can be better understood by understanding the logic of TPS and the pricing mechanism of fees.

TPS is the number of transactions per second, which is equal to the number of transactions each block can hold ➗ the time to exit the block. After the implementation of EIP-1559 last August, the baseline space for a single block is 15 million gas (gas is the unit of measurement consumed by operations on Ethereum), and when demand increases, the space for a single block can be capped at 30 million gas.

Since the "execution" part of the merger has not changed, the space size of individual blocks remains unchanged, following the original 15 million base and 30 million cap. As for the block speed, the current Ethereum mainnet basically maintains one block per 13 seconds, which will be changed to one block per 12 seconds after merger. In other words, the TPS may increase by ~1 second at most due to the increase in block speed, bringing a <10% increase.

The reason for Ethereum's block size and exit speed limitations is to ensure that nodes can be fully verified and instantly synchronized to achieve sufficient security and decentralization.

Understanding the TPS, the logic of the fee is also obvious, Ethereum's fee pricing mechanism has changed significantly after the implementation of EIP-1559 last year, divided into two parts: Base Fee and Tips. The base fee is determined entirely on the basis of supply and demand, with demand being the transaction requests submitted by users and supply being the compute space Ethereum can provide. If the number of requests received for a block is greater than the number of requests actually processed by the previous block, the base fee for the next block is increased by up to 12.5%. Tipping is a reward for miners, and is essentially a bidding mechanism to attract miners, again determined by demand.

Since TPS is not essentially changed and the computational space is still limited, merger does not change the supply and demand relationship and cannot affect the fee.

1.3 Merger impact #2: ETH will be micro-deflationary

Currently, ETH has both issuance and burning mechanisms, and is micro-inflationary overall; after merger, the overall deflation will be 1%~2% due to the reduced issuance rate.

At present, ETH has an incremental mechanism: each block generates 2 ETH miner rewards, and the annual incremental rate is estimated to be about 4.3% based on the current block rate and total circulation. The burning mechanism is that the "base fee" described in subsection 1.2 will be burned, which is about 2.9 million ETH per year, and the overall inflation rate is estimated to be ~2%.

After the merger, the biggest change is that the block reward will be significantly reduced to ~90% of its original value, and assuming a constant annual burn, the overall deflation will be ~2%.

Ⅱ. Ethereum's Scalability Dilemma

Ethereum, the most mainstream smart contract platform, is known for its security and decentralization features, however, it still lags behind in terms of scalability: Ethereum's current TPS (number of transactions per second) is between 10 and 15, with insufficient supply and high demand, resulting in high fees determined by bidding, costing several dollars to tens of dollars per transaction.

For comparison, BNB's TPS is between 40 and 50, and Solana is at 1,000+, the same level as Visa.

Decentralization, Security, and Scalability can only be one or the other, which is also known as the Blockchain Impossible Triangle. Ethereum's initial choice was to forgo scalability to make it consistent with Web3's most important values.

If scalability is achieved in a simple and brutal way, then security or decentralization will be sacrificed. The first method is to expand the block capacity, but this will lead to the same expansion of the verifier's workload, and eventually the verifiers who can bear the workload will be concentrated in the data center and controlled by the giant, losing the decentralization feature, which is why Ethereum's current block capacity and block speed are limited, and this is the only way to allow ordinary people to participate in verification; the second method is to have more torrents (public chains), but this will lead to a proportional decrease in security due to the decentralization of verification. The second method is to have more cottage coins (public chains), but this will lead to a proportional decrease in security due to decentralized verification.

Nevertheless, Ethereum has been actively looking for scalability solutions and has identified a scale-up path centered on Rollups + Sharding as early as 2020.

Ⅲ. Ethereum Scaling Route-Rollups+Sharding

According to the current classification on Ethereum's official website, "Scaling" is divided into on-chain and off-chain scaling, where on-chain scaling is "sharding", which is a change to Ethereum's main network; off-chain scaling is Layer2 and other types of solutions independent of Ethereum's main network.

As on-chain expansion of Sharding is a change to the Ethereum mainnet, it will migrate all historical data, so the process is slow, officially, Sharding is expected to be implemented in 2023, while multiple options for off-chain scaling are already in place, with Rollups being the main route chosen by the Ethereum community and the short-term focus of the scaling roadmap. The following section will introduce off-chain and on-chain scaling respectively.

3.1 Off-chain Scaling: The Triumph of Layer2 and Rollups

The official Ethereum website defines Layer2 in a relatively narrow sense, referring to Rollups and State Channels as Layer2, which are the two solutions that accomplish consensus through the main network.

The following types of schemes are briefly described.

(1) Rollups: The execution of transactions is done outside the Ethereum mainnet (i.e., off-chain), and then multiple transactions are packaged and posted to the mainnet, where consensus is completed. By placing the computation execution off-chain and packing and compressing part of the data to return to the chain, the use of mainnet space is reduced.

It should be noted that the information packaged and published by Rollups must contain: (a) State Root, which represents the balance of all accounts after the transaction is completed, i.e., the result state of the transaction: (b) transaction information, i.e., the transaction instruction of how much A transfers to B. With these two parts of information, the main network nodes can do full verification of the transaction history on Rollups, so the security of Rollups can be guaranteed by the main network. This is a key point and the reason why Rollups is different from Plasma/Validium and is recognized for its security.

Within Rollups, there are two categories, one is Optimistic Rollups, which uses Fraud Proof, i.e., a challenge mechanism that allows validators to challenge faulty transactions, and challenged transactions need to be re-executed on the L1 mainnet, called "Optimistic Rollups" since all transactions are assumed to be legitimate under normal circumstances; the other category is ZK Rollups, which uses Validity Proof, where all transactions submitted to the L1 mainnet are required to pass a zero-knowledge proof.

Optimistic Rollups are the earliest rollups with mature cryptographic solutions that are compatible with EVM, typically Arbitrum and Optimism, but ZK Rollups require more concise data to be packaged and uploaded to L1, making the execution of transactions faster and more efficient. High migration costs for developers

(2) State Channels: Participants can complete multiple transactions under the chain through multi-signature contracts, accumulate the amount, and record the final one on the main network. However, the application scenario of this type of solution is very limited, only network participants can use it, and it requires pledging a very large amount of money in complex transactions.

(3) Sidechains: EVM-compatible chains independent of the main network, which can be bridged to the main network through a two-way bridge, but their consensus logic and block parameters are unrelated to the main network. Since it is completely independent, the security cannot be guaranteed by the main network, typical projects such as Polygon.

(4) Plasma: Similar to Optimistic Rollups with lower security level, Plasma itself is a blockchain with an infinite number of subchains, each of which is similar to a branch of a tree that performs some of the transactions, and the status of all the transactions will eventually be aggregated into a hash value and published to L1. However, this hash value cannot recover all the transaction history because the transaction information in the process is stored in each sub-chain, i.e., each branch of the tree, and the verification node cannot be sure that all the blocks in the sub-chain have sufficient proof of data validity. Once the information of any block cannot be confirmed to be valid, the transaction history of the whole chain will be in crisis, which is also known as The Data Availability Problem.

Two similarities between Plasma and Optimistic Rollups are that they both place the computation off-chain and both take proof-of-fraud. The key difference is that Rollups compressed uploads still contain a full transaction history, while Plasma does not.

(5) Validium: Similar to ZK Rollups with lower security level, it also takes zero-knowledge proof, but the data is not stored on L1, typical projects such as Immutable X and DeversiFi which adopt StarkWare technology.

Overall, Rollups are the most secure and widely used off-chain scaling solution (unlike State Channels, which are only available to network participants). Therefore, Rollups is considered to be the most important scaling path until sharding is implemented.

The figure below shows some of the mainstream Layer2 projects, and as you can see, Rollups is in fact the most widely adopted technology, with the mature Optimistic Rollups being more widely used and available for any smart contract, while ZK Rollups is often limited due to limitations in EVM compatibility.

It is worth noting that Metis, ranked #5 in TVL, was rejected as an "Optimistic Chain" instead of an "Optimistic Rollup" because it does not keep all transaction data on the chain, but rather through MEMO, a decentralized storage project under the chain, which achieves ultra-low fees at the expense of data availability.

The Metis trade-off also reflects a problem for Rollups: since it still needs to publish transaction data on L1, its scalability is limited by the storage space of the Ethernet mainnet. all Rollups can do is to compress and upload as little data as possible to L1 to improve throughput.

In this respect, ZK Rollups has an advantage over Optimisitc Rollups. Since ZK Rollups solves the validation problem through zero-knowledge proofs, all transaction data posted to L1 is already validated, so if some of the transaction information is only used for validation and not for computing the latest result, this information can be placed under the chain in ZK Rollups, but must be placed on the chain in Optimistic Rollups for ZK Rollups are more space efficient on-chain than Optimistic Rollups.

The figure below shows the comparison of fees for multiple L2s (assuming Metis is still classified as an L2), and it can be seen that, except for the privacy-oriented Aztec and the controversial Metis, which are relatively special, the ZK-based Loopring/ZKSync/Polygon Hermez fees are lower than the OP-based Optimism/Boda/ Arbitrum.

So, to what extent can Rollups actually increase TPS? Simply put, assuming that Rollups takes up all the space on the main network, the theoretical upper limit is about 100 times that of the main network. Using ZK as the upper limit, a transaction to send ETH takes about ~12 bytes, while on the mainnet it takes ~110 bytes, while ZK requires very little proof space, and the extra space required to verify the packaged data of a single ZK is less than 5% of the Ethereum block space, so roughly speaking the TPS is 100 times that of the mainnet. Currently, the main network has a daily TPS of about 15 and a theoretical maximum TPS of about 100, so the theoretical maximum TPS of ZK Rollups is about 10,000.

Of course, 10,000 TPS is a very desirable number that is almost impossible to reach: first, it is difficult to achieve with only a single packaged transaction in a single Ether block, and the space required for validation increases with multiple transactions; second, it is unlikely that the main network will be able to sustain the theoretical cap, because after the implementation of EIP-1559, if the demand for block space continues to climb, then the fees will continue to escalate until users cannot afford The

From Optimism's recent transfer data, the simplest ETH transfers can boost TPS by about 5-6x. Here is a simple ETH transfer transaction that consumes 21,000 gas on the Ethereum mainnet, but only ~3,800 gas on the mainnet via OP.

In summary, Rollups can theoretically increase the mainnet TPS by 100x, but some pragmatic estimates suggest that Optimistic Rollups can increase it by about a few times, and ZK Rollups should increase it by tens of times.
Is there a way to expand the storage space of the Ethernet mainnet and further increase the TPS while maintaining security and decentralization? That's what sharding is all about.

3.2 On-chain Scaling: The Principle and Meaning of Sharding

To continue to break through the TPS, we need to expand the storage space of the mainnet, and Sharding is the technical solution to achieve this purpose.

In the Sharding scheme, the main network is called the Beacon Chain, and there are 64 shards on top of the main network to generate blocks and store information. In each block cycle (Slot, set to 12 seconds), a Proposer is randomly generated in each shard to produce a shard blob and broadcast it to the main network.

Sharding is somewhat similar to Rollups in that it stores data and frees up space through a data layer outside the main network, but Sharding uses two techniques that differentiate it from Rollups and also achieve the goal that a single node does not need to download the full amount of data to verify transaction history.

The first technique is the random selection of the validation committee. For each slice block, the full number of verifiers is randomly disrupted to form a one-time verification committee to verify that one slice block. This randomness ensures that it is difficult for the culprit to put all its bought and paid-for validators into the same committee for validation, unless the culprit controls more than 1/3 of the validators.

The second technique is random extraction of data availability, where each client does not need to download the full amount of data when verifying the chunks, but only a random portion of the chunks to verify at least 50% of the data validity.

With the above steps, sharding enables the verification of a random sample of nodes and a random sample of data, instead of requiring nodes to verify the full amount of data in the main network as it does now, thus enabling the main network to scale up.

So, how much expansion can Sharding contribute? According to the current design, there are 64 shards, and each shard will produce ~250 KB of data blocks every 12 seconds, which means it can carry 16 MB of data every 12 seconds, and ~1.3 MB of data per second. Comparing with the current state of ETH main network, the target carrying space of each block is 15 million gas, a simple ETH transfer requires ~110 bytes and consumes 21,000 gas, based on an average of 13 seconds for a block, it can be estimated that the current main network can carry ~77 KB of data per second. Therefore, sharding can bring about ~17x (1.3 MB/77 KB) performance improvement.

There is no clear time expectation for sharding. The official plan is 2023, but given that merger is not yet on track, I'm afraid that 2023 is too optimistic. The current scaling relies on L2 for implementation.

3.3 L2 Frontier Project at a Glance

Arbitrum, Optimism, ZKSync, and StarkNet are the four most mainstream L2 projects at present. Combing the project base information, we can find that

(1) OP is more mature, Arb occupies the top of TVL, and ZKSync and StarkNet are far apart from ZK, which is technically difficult and not naturally compatible with EVM, so the ecological development is slow.

(2) Both OP and ZK have strong capital forces behind them. In September last year, Arbitrum's valuation reached $1.2 billion, and in May this year, StarkNet's parent company wowed Web3 with an $8 billion valuation. head Crypto investment institutions such as a16 z/Paradigm are betting on both OP and ZK-series projects. optimism has just launched a coin, and although the initial performance is poor, FDV still has $5 billion. FDV still has $5 billion; other than that, all three have yet to issue a coin, which is a potential Airdrop to look forward to in the next wave.

IV. Summary

Ethereum's "consensus logic change" and "scaling" are the two main themes of Ethereum upgrade, and this paper also introduces the consensus logic change and its impact, various scaling solutions and their degree of implementation from these two parts.

The purpose of Ethereum merger (The Merge) is to change the consensus logic from POW to POS, thus greatly reducing energy consumption; however, since the execution logic is not changed and the computational storage space of Ethereum is not changed, there is basically no impact on TPS and fees, while the ETH growth rate will drop significantly after the merger, resulting in micro-deflation. After merger, the ETH growth rate will drop significantly, causing micro-deflation.

In parallel, Ethereum's Scaling process aims to improve Ethereum's processing performance/TPS, and only after the supply capacity is increased, the fees, which depend on supply and demand pricing, can be reduced. Scaling is divided into two categories: on-chain and off-chain. On-chain is a change in the operating logic of Ethereum's main network, using a sharding scheme to divide and rule 64 sub-block chains on the main network, but it is still far from the expectation of implementation; before this scheme is realized, the Ethereum community has adopted the Rollups scheme in off-chain scaling as the short- to medium-term path, and Four major mainstream L2 projects have emerged from this track, with individual project valuations in the billions of dollars today.

The interesting question is how Rollups and Sharding will be combined in the future, and V-God's ideal hypothesis is that the utility of the two will be iterative: ZK Rollups can theoretically increase TPS by ~100x, and Sharding by ~20x, assuming a TPS of 50 for ETH (currently ~15) and a future TPS of ~100,000 for Ethereum. However, this assumption is so ideal that it is almost impossible to achieve.

A pragmatic estimate is that current OP Rollups can increase TPS by ~5x, and ZK Rollups should be able to increase it by tens of times. If ZK becomes EVM friendly and its potential is fully realized, OP's ecosystem will suffer. It is not clear whether sharding will still be necessary, as it is possible to achieve ~1,000 TPS with ZK alone.

Ethereum's merger has been delayed, but the end of the POW mechanism should be achieved by the end of 2022. Ethereum has a long road to upgrade, but it will definitely affect the public chain landscape in the end.

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